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External Guarantee / Counter Guarantee External Guarantee / Counter Guarantee

External Guarantee / Counter Guarantee

It is irrevocable commitment made by the guarantor bank against the beneficiary (Applicant).

What is External Guarantee / Counter Guarantee?

In Letter of Guarantee transactions, the performance of the party on behalf of whom the guarantee is issued (Customer) is guaranteed by the bank. In the event of Customer’s failure to fulfil its performance, the payment under the letter of guarantee is made upon the request of the Applicant.

The main difference between the letter of guarantee and letter of credit is its nature of assurance instrument. In letter of credit, the payment is made when the performance is fulfilled while the payment is made as compensation when the performance is not fulfilled in letter of guarantee.

Letters of Guarantee can be issued as direct or counter guarantee. Direct Guarantees contain a direct guarantee of the guarantor bank against the Applicant while Counter Guarantees are letters of guarantee issued by another bank called as counter guarantor bank against the guarantor bank in order to ensure the guarantor bank to issue a letter of guarantee against the Applicant.


Guarantor: The bank which undertakes and commits to pay the amount indicated in the letter of guarantee in full and in cash without raising any objection upon the first written demand of the Applicant in the event of failure to duly perform the work or fulfil the obligation.

Customer (Amir): Natural or legal person to whom the guaranteed amount will be refunded in the event of the party who will carry out the work, join the tender and receive the advance payment fails to fulfil its commitment or fails to act in accordance with the contract provisions.

Applicant: Party who benefits from the provision of the letter of guarantee.

Counter Guarantor: The bank which issues letter of counter guarantee against the guarantor bank as a security for the letter of guarantee to be issued by the guarantor bank againdt the Applicant.

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